Examining The Ukrainian Tax Implications Of Russia’s Invasion

Valeria Tarasenko of Dentons Kyiv discusses the Ukrainian authorities’s tax coverage adjustments in response to the Russian invasion.

This transcript has been edited for size and readability.

David D. Stewart: Welcome to the podcast. I am David Stewart, editor in chief of Tax Notes At this time Worldwide. This week: battle and tax.

Since February 24 Russia’s invasion of Ukraine has created Europe’s largest refugee disaster since World Conflict II, with greater than 10 million individuals being compelled to depart their properties and numerous casualties amongst those that remained.

As of our recording right this moment, April 20, the battle is ongoing with Russian forces refocusing their efforts within the east of the nation after failing to seize Kyiv and dropping their Black Sea flagship. The Ukrainian individuals have mounted a fierce resistance to the invasion, and in opposition to lengthy odds the federal government in Kyiv continues to function and make tax coverage.

Tax Notes reporter Sarah Paez will be a part of us in a minute to inform us about her visitor, who spoke concerning the tax adjustments made in response to the invasion and what the long run may maintain.

Sarah, welcome again to the podcast.

Sarah Paez: Thanks. It is nice to be again.

David D. Stewart: Now, I perceive you latterly spoke with somebody about Ukraine’s tax scenario earlier than and through the battle. Might you inform us about your visitor?

Sarah Paez: Positive. I spoke with Valeria Tarasenko. She’s a tax advisor with Dentons, which is a multinational legislation agency with workplaces in Ukraine. Previous to the battle she was primarily based in Kyiv, however has since relocated to Austria together with her household to flee the combating. Valeria has over 15 years of tax expertise advising Ukrainian firms on cross-border tax structuring and tax-saving options, tax dispute resolutions, and tax litigation and determination of cross-border tax controversy.

David D. Stewart: What kind of matters did you speak about?

Sarah Paez: Nicely, we mentioned among the main adjustments to the Ukrainian tax system through the battle, together with giant reductions within the company earnings tax price and VAT and excise taxes on gas. Valeria additionally instructed me a couple of comparatively new tax regime created by the Ukrainian authorities to encourage the success of the IT providers sector in Ukraine. It has been a boon for the IT business throughout a battle wherein most sectors have been hit very laborious economically. Lastly, we appeared forward at among the pending and potential future tax adjustments that would affect Ukraine’s post-war financial system.

David D. Stewart: All proper, let’s go to that interview.

Sarah Paez: Hello, Valeria. Welcome to the Tax Notes Discuss podcast. It is so nice to have you ever right here.

Valeria Tarasenko: Oh, thanks.

Sarah Paez: I simply wished to kind of lead in with the Russian invasion of Ukraine. Ukraine has been plunged into this battle, so may you inform us just a little bit about what the Ukrainian tax system has been like throughout wartime?

Valeria Tarasenko: Sure, you are proper, sadly brought on by the Russian invasion, it heated the Ukrainian financial system loads, and we’ve got to adapt to operate in wartime. In fact, our Ukrainian authorities made loads of changes to prepare and assist Ukrainian enterprise and tried to introduce some tax system that might work each for the state and for the enterprise. These days we’re not talking about some income, we’re talking concerning the survival of the enterprise.

The important thing message, which Ukrainian authorities addressed to all companies and inhabitants, is the companies have to take care of workplaces for Ukrainians and hopefully create new workplaces for Ukrainians which relocated from the jap half to central and western Ukraine, the place it is kind of protected to function enterprise.

Sarah Paez: Nicely, with that, what are among the adjustments that Ukrainian companies have seen particularly of their company earnings tax?

Valeria Tarasenko: Ranging from April 1 Parliament adopted the legislation which lowered 18 % company earnings tax and the 20 % VAT to solely a single 2 % tax, which is calculated primarily based on the income the corporate had within the earlier quarter. So, just one tax is left, it is a 2 % income tax, which is clearly very low.

Nevertheless it’s completely voluntary. It isn’t that each enterprise is obliged to switch to this method. Any enterprise which feels that taxes will probably be low underneath this 2 % single tax, they will voluntarily switch to the cost of this single tax.

Different firms, if it does not match with their enterprise operations, for instance, their companies haven’t been damage by this battle scenario in Ukraine, they will proceed paying common taxes as is described through the common time, not wartime. However in line with statistics, I noticed that loads of Ukrainian firms, middle-sized and enormous companies, have already transferred to the cost of this 2 % income tax.

The one drawback this 2 % income tax has is the taxes need to be paid prematurely. You’re calculating this 2 % tax primarily based on the outcomes of the earlier month and pay tax prematurely. If companies can afford this, after all they switch. If not, some companies want to remain on the common system.

Secondly, this method permits exemption from VAT, which make items, provides, and providers offered by Ukrainian firms, or imported from exterior, cheaper by 20 %, as a result of we’ve got 20 % VAT in Ukraine.

Plus, the reporting system can be very simplified, so it is a quite simple process to submit tax returns and pay for the brand new taxes.

Sarah Paez: That is very complete. Additionally it actually sounds just like the Ukrainian authorities is kind of giving this feature to companies in case they’re actually struggling.

I wished to ask you just a little bit extra about excise taxes and the way these may have an effect on the import and export of products through the battle and likewise VAT. The VAT on the import and provide of petroleum has been lowered from 20 % to 7 %. Are you able to speak just a little bit extra about that and what that is supplied to the Ukrainian forces and likewise probably Ukrainian households?

Valeria Tarasenko: Sure, truly it means loads as a result of I bear in mind, inside two weeks after the invasion began, costs of petroleum went up by 50 %, which is loads. It signifies that as soon as costs to petroleum went up, costs to different merchandise will even go up due to logistics. Every thing depends upon petroleum. It was a proper choice to cancel excise tax on import and provide of petroleum and petroleum-related items, as a result of such items are topic to excise in Ukraine.

Plus, Parliament voted to cut back VAT on petroleum from 20 % to 7 % and costs on petroleum for retail prospects dropped considerably. In fact, it additionally stopped costs on different items, that are not directly affected by their costs on petroleum in Ukraine, so it was completely the suitable choice.

I do not bear in mind if I discussed it or not — all these measures are momentary measures. It is only for the interval of the battle, when the federal government declared martial legislation standing. As soon as martial legislation standing is terminated or canceled, all these excise taxes and common VAT charges will probably be relevant once more.

Sarah Paez: I additionally wished to ask, since you stated these are momentary measures, with all these tax adjustments and particularly chopping taxes in loads of conditions, how is the Ukrainian authorities guaranteeing the sustainability of public income, particularly throughout wartime?

Valeria Tarasenko: It’s extremely laborious to talk about sustainability in our scenario. It is a matter of survival. When the battle began, the federal government truly declared, “Enterprise, in case you can, please pay taxes prematurely.” A number of companies did. They paid taxes prematurely to assist Ukraine and the state.

However now the financial system is dropping, and I noticed the experiences from IMF that the Ukrainian GDP can shrink by 35 % for 2022. So, after all it’s totally laborious to talk about sustainability of public revenues, however nonetheless the federal government does their greatest to plan and to get some income from the taxpayers.

As I stated, for companies it is a key job to take care of workplaces for Ukrainian residents. Not like company tax, private earnings tax was not modified and no tax profit was offered for people or for his or her derived earnings. When Ukrainian residents obtain a wage, it is going to be nonetheless topic to 18 % private earnings tax, 1.5 % navy tax and social contributions. All these taxes will go to the state.

Secondly, how Ukrainian authorities tries to fill within the price range is it managed to challenge navy bonds and it efficiently bought the bonds to Ukrainians. And naturally, it is financing from different states and from worldwide establishments, reminiscent of IMF. We’re lending. Sadly we’ve got to lend cash now.

Sarah Paez: You have stated earlier than that the Ukrainian authorities, and by extension the Ukrainian tax system, has form of actually been in survival mode throughout this time. Are you able to speak just a little bit about what the tax administration has been doing? Have they suspended any of their common scheduled actions? Are there issues they are not doing?

Valeria Tarasenko: Sure, I’d say that Ukrainian tax administration is now very person pleasant. They terminated and canceled all tax audits and no tax audit is permitted now. Really all their tips, how one can apply these new tax advantages which have been launched into the legislation, they’re offering clarification how it’s a must to apply, which is allowed, which isn’t. I’d say that they are pleasant to prospects, not like it was earlier than as a result of their strategy was at all times fiscal. That is first.

Secondly its momentary tax legal responsibility for violation of tax legislation — violation will not be submission of obligatory tax returns, sure tax reporting in time, or nonpayment of taxes in time as a result of a taxpayer did not have the capability to pay. Its penalties aren’t charged for these violations, however there’s an obligation of inside six months to adjust to the tax necessities after the extermination or expiration of the martial legislation standing. Now no tax penalties are charged that apply to the taxpayer, which can be sure reduction as a result of in some areas, it was very laborious to conform. Even submitting a tax return was laborious.

Sarah Paez: What else has the tax administration achieved to make the battle efforts simpler? You talked just a little bit about how the federal government’s making an attempt to shore up its coffers. What about by way of donations to the battle effort? What sorts of tax adjustments have you ever seen there?

Valeria Tarasenko: Sure, in each jurisdictions we’ve got donation allowances. It is normally very small quantities. Parliament adopted the legislation, which permits each firms and Ukrainian residents to deduct a part of the donations, which they donated for Ukrainian humanitarian wants, to Ukrainian charity funds, or to the Ukrainian navy forces. In the event you donate, it’s a must to present sure proof and paperwork that you simply offered a donation. Part of these quantities could be deducted upon tax reporting for 2022, which could be enormous quantities compared to what was allowed earlier than the battle.

Sarah Paez: Now, many industries have suffered through the battle, as you’ve got stated, however truly IT providers appear to be doing pretty OK. Are you able to speak just a little bit about how IT providers are doing and what types of tax incentives the federal government has supplied to them, notably the Diia Metropolis Regulation?

Valeria Tarasenko: Sure. I feel IT business is the one business which possibly in the long run will profit from the scenario as a result of for IT specialists, you simply want a laptop computer and that is all. You possibly can relocate in anywhere, whether or not inside Ukraine or exterior Ukraine and proceed working.

Sure certainly, we had a really nice initiative from our president, Volodymyr Zelenskyy, which got here into drive ranging from January 1, 2022, with so-called Diia Metropolis Regulation, which offers plenty of tax privileges and authorized privileges to firms that are working within the IT sector.

I’d first talk about the important thing tax profit, which the Diia Metropolis Regulation offers. It offers very low taxes on incomes paid to workers or IT specialists engaged by IT firms. It is solely 5 % private earnings tax, 1.5 % navy tax, and really insignificant social contribution, which is round $55 per thirty days, which is nothing. Mainly, efficient tax price for IT specialists working or engaged by IT firms is 6.5 %, which may be very, very low.

I feel loads of IT specialists worldwide would like to work and keep and to be a tax resident of Ukraine and pay such a low tax. However to be a resident, like an organization, which may fall inside this Diia Metropolis regulation, it must be a pure Ukrainian firm. It must be a authorized entity registered in Ukraine and its actions need to relate to IT exercise.

There’s a very intensive checklist of actions, which is huge: IT could be laptop programming, cybersecurity consulting, recreation growth, design, and so on. Quite a bit, loads. The checklist is admittedly intensive of actions. There are a minimal variety of necessities, however they’re very do-able, just like the minimal variety of workers must be not lower than 9. Common wage per thirty days, it must be round €1,200, which can be very inexpensive.

Actions, as I stated, need to be IT-related. 90 % of income must be obtained from IT enterprise exercise. Solely 10 % could be different varieties of exercise, like dividends, for instance, like passive incomes or one thing like this. The founders or useful house owners can’t be from the jurisdictions listed within the blacklist, from sanction checklist jurisdictions, or from Russia. That is all.

This regime continues to be very engaging as a result of a part of Ukraine continues to be kind of protected, particularly the western half. A number of Ukrainian IT specialists have been relocated to these areas and their firms additionally re-registered to these areas. They nonetheless can apply this Diia Metropolis, a really favorable Diia Metropolis regime.

I see that I nonetheless have requests from some worldwide IT firms or some multinational firms, however with giant IT departments, to register a authorized entity in Ukraine for IT functions. I see that loads of job vacancies are open for IT sector as properly, even now through the wartime, due to this very useful tax regime for the IT sector.

Sarah Paez: Have you learnt what number of companies have taken benefit of this legislation?

Valeria Tarasenko: I feel each IT firm working in Ukraine has already registered earlier than the battle or tried to register now as a result of as I stated, it’s totally useful. It offers loads of advantages to the IT sector in Ukraine.

Sarah Paez: I wished to show now to kind of a future look, and typically it is laborious to kind of take into consideration what the long run may appear to be, however permit your self to think about. What tax laws is predicted within the postwar time? As you’ve got stated, many of those legal guidelines that you’ve got gone over are going to run out as soon as martial legislation ends. What’s forward for the post-war interval?

Valeria Tarasenko: Sure, it’s totally laborious to foretell what adjustments will probably be, however I am certain that after the battle many adjustments will probably be launched. It depends upon the wants in Ukraine.

Firstly, we’ve got to rebuild these areas which have been utterly destroyed. We have now to construct new homes, new house buildings for these individuals who used to stay in these areas. I am certain there will probably be some particular tax preferences for building, for residential building, for infrastructure tasks. I am certain that will probably be. There is not any draft legal guidelines, however no less than I see {that a} tax committee of the Ukrainian parliament had discussions that we have to determine some mannequin which can permit Ukraine to rebuild as quickly as potential the areas which had been destroyed.

Secondly, they notice that this aggression from Russia will keep even once we signal a peaceable settlement, so we as a nation and as a state have to actually make investments into the event of our navy business. I additionally count on that there will probably be some particular regulation, possibly particular legislation for navy business, together with some tax regulation for growth of this sphere as properly.

One initiative, a draft of legislation which is already within the parliament and into account, is about extra taxation of multinational firms which have each operations in Ukraine and nonetheless lively operations in Russia. Corporations which haven’t withdrawn from Russia. They need to introduce a particular tax, one no less than now mentioned, a 1.5 % along with the company tax, ecology tax, property tax, these multinational subsidiaries financial institution in Ukraine.

I’d say that this draft legislation is closely criticized now as a result of the standards. It isn’t very clear and it may be interpreted in numerous methods. Subsidiaries of multinational firms that are working in Ukraine, they’re actually like, “No, you need to not vote for this legislation.” However I feel topic to dialogue and a few amendments, it can most definitely be adopted inside subsequent month.

Sarah Paez: Nicely, thanks a lot, Valeria. That was a really fascinating dialog and simply gave a extremely nice rundown of what is occurring in Ukraine on the tax aspect.

Valeria Tarasenko: Thanks.